With so many headlines scrutinizing the actions of the nation’s largest banks, it might be surprising to find that directors of the very smallest institutions are putting in the most hours this year, and often, with the least rewards for their trouble. Those are some of the findings of Bank Director’s annual compensation survey co-sponsored by Meyer-Chatfield Compensation Advisors.
Survey respondents report familiar compensation challenges, but frustration appears to be growing with the board’s ability to handle these challenges. It is not all bad news for bank directors, however. The vast majority of respondents expect to maintain or even increase director compensation this coming year, a sign of improvement after years of lower margins and profits.
The compensation survey was emailed throughout April and May to CEOs and directors at banks ranging in asset size from under $100 million to over $5 billion. The response rate was 5.7 percent, with 549 CEOs or directors completing the survey. The data gathered in the survey, as well as the comments provided by our respondents, offer insight into the compensation challenges, trends and frustrations of 2012.
Downward Trend in Satisfaction
Board satisfaction with compensation continues to decline this year. Only 58 percent of respondents feel their board is managing executive compensation well or very well, compared to 63 percent last year and 74 percent in 2010. Similarly, only 53 percent feel director compensation is being managed well or very well, compared to 56 percent last year and 68 percent in 2010.
Meyer-Chatfield Compensation Advisors President Flynt Gallagher says that some of this dissatisfaction is the result of increased director scrutiny from shareholders, regulators and the market, which can make compensation committees reluctant to institute programs when their actions may be questioned or criticized.
JR Llewellyn, senior vice president at Meyer-Chatfield Compensation Advisors, adds that directors are being put on the defensive when it comes to compensation practices.
“Historically, compensation was deemed to be acceptable if it was not unreasonable,” says Llewellyn. “Today, we have transitioned into defending compensation practices. This is an unfortunate turn. In a highly regulated industry, talented executives are constantly recruited and the directors must be frustrated at the dichotomy that exists. On one hand, compensation practices must be rich enough to keep their executives in place, on the other hand, they must be able to clearly defend their position, as shareholders have become more vocal because of the media coverage and watchdogs.”
Directors at Small Banks Work Longer Hours
The median hours spent on the job for institutions of all asset sizes remained the same this year as last year at 15 per month, but there were large changes in the hours reported by banks in the highest and lowest asset categories. Directors at banks with under $100 million in assets report working 20 hours per month this year; that is 5 hours more than they reported working last year and double the year before. Bigger banks reported working fewer hours.
Gallagher says directors at the smallest institutions may be making up for limited resources by putting in extra hours to fulfill their fiduciary and oversight duties, while at the same time trying to meet shareholder expectations and ensure regulatory compliance.
Justin Heideman, a director at Town & Country Bank in Saint George, Utah, a de novo institution with less than $70 million in assets, says he has no doubt directors at these smaller institutions are putting in more hours because of compliance. “We have the same requirements on the [information technology] side in terms of safeguards that a major bank has,” says Heideman. “It’s nonsensical the amount of time that is required to make sure that compliance is appropriate and to make sure we do all of our training. We have to do pop quizzes like I was in second grade during board meetings to make sure our training is done and to prove we are being trained. It’s ridiculous.”
Response to Federal Regulations
Only 40 percent of respondents say their bank made changes in response to new federal regulations requiring banks to analyze risk in incentive compensation plans. Ninety percent of respondents say the compensation committee, including the chairman, aids in the analysis of compensation risk, while 66 percent say the CEO aids in the analysis. Only 19 percent use a general counsel for analyzing compensation risk.
The number of banks that have implemented a clawback provision for executive pay is similar to last year at 32 percent. For banks with clawback provisions, 70 percent have them for management teams and 69 percent have them for CEOs. Only 29 percent have them for loan officers.
Top Compensation Challenges
For this year’s survey, respondents were asked to list up to three of their top compensation challenges in 2012. The most common answers are tying compensation to performance, retaining key people and developing a succession plan, followed closely by understanding and complying with regulations. Last year, we asked respondents to list the single most challenging issue for their compensation committees. The most common answers chosen were performance pay metrics, gathering and understanding peer/comparison data, long-term incentive plans and regulatory compliance. For both 2011 and 2012, respondents were moderately concerned with regulatory compliance, but chiefly concerned with correctly equating pay to performance and retaining talent.
“Compensation is all about rewarding those who contribute to the success of the organization. Getting good talent and keeping it is critical to executing the strategic plan and accomplishing the objectives,” says Gallagher. “Maintaining competence in the management team in a seamless manner as retirements occur is also important to running an effective organization. It is not surprising these are important issues to management and the board as well.”
Linking CEO Pay to Strategic Plan
Slightly more than half of all respondents in the survey say their banks link CEO pay to a strategic plan, and 77 percent say CEO compensation is linked to key performance indicators. Of those who link CEO pay to performance indicators, the most common indicators were the same as last year, asset quality and return on assets at 72 percent and 65 percent, respectively. Fifty-seven percent of respondents consider return on equity, and 39 percent consider total return to shareholders, while the same percentage, 39 percent, consider earnings per share growth.
Gallagher says asset quality and bottom line performance have been significant issues for banks recently and are primary objectives for bank management. The drive for financial performance needs to be tempered by sound risk management practices and the protection of the bank’s assets and value, he says. Key indicators should be developed based on what makes sense for an individual institution. The indicators may consider bank size, business model, market area and whether the bank is public or private.
Compensation Could Increase Next Year
On a positive note for directors, more respondents (32 percent) expect director compensation at their banks to increase in 2013 than in 2012 (28 percent). Only 1 percent of respondents expect a decrease in compensation in 2013, and 67 percent expect director pay to stay the same.
Gallagher says the financial performance of many banks is showing an improvement after struggling with asset quality issues, lower margins and lower profits in recent years. With this improvement some banks are feeling relief and even optimism.
And yet, even as compensation holds steady or even increases, benefits for directors continue to erode. The number of banks offering zero benefits to outside directors has significantly increased—46 percent this year compared to 39 percent last year and only 28 percent the year before.
Making cuts to benefits while keeping compensation steady might make sense for many banks, as it seems to align with what directors find most important when considering a new board seat. When asked to rank the importance of different types of benefits and compensation when considering a new board seat, 51 percent of directors assign little or no importance to retirement plans while only 27 percent find them important or very important. Similarly, 44 percent of directors assign little or no importance to insurance benefits, while 28 percent find them important or very important.
The opposite holds true for cash fees and equity compensation. Sixty-two percent of directors rate levels of cash fees/retainers as important or very important, while 16 percent rate cash fees/retainers as having little or no importance. Respondents report equity compensation is slightly less important than cash fees; 54 percent of directors rank equity compensation as important or highly important while 20 percent give equity compensation little or no importance.
“Cash and equity are easily defined and valued by directors,” Llewellyn says. “The value of certain other benefits is determined more on an individual basis. Benefits are an easy target when looking to hold the line on director compensation.”
It is important to note that many respondents believe liability and potential growth of the institution are even more important factors when considering a board seat than the compensation or benefits package. Clyde White, chairman and CEO of Ouachita Independent Bank, a commercial bank in Monroe, Louisiana, with $570 million in assets, had this to say: “If I were considering joining a bank board, I would want to know what investment opportunity I would have and what the potential for growth is of that investment. I would also want to know what value I would be expected to bring to the table [i.e., business development activities, business acumen].”
Chairman Pay Increases
Respondents report compensation is fairly stagnant for outside directors, but increasing for chairmen. This year, chairmen were paid a median cash retainer of $12,000, compared to $10,000 last year. Outside directors were paid a median cash retainer of $10,000 for both this year and last. Similarly, median board meeting fees remained identical for directors at $600 per meeting, while they rose slightly for chairman from $600 to $675. Other cash compensation increased by about $1,000 for chairmen this year as well.
Stock Ownership Guidelines and Equity
This year, the number of respondents saying they have stock ownership guidelines rose from 41 percent to 46 percent. Of those with stock ownership guidelines, 63 percent are required to have a minimum or fixed number of shares, 27 percent are required to have a minimum share value and 13 percent are required to have a multiple of the annual retainer. Only 2 percent were required to have a multiple of annual cash compensation.
While respondents report cash fees to be slightly more important than equity when considering a board seat, many respondents reported that stock ownership guidelines are a better way to promote board performance. Charles Thal, a director of The Business Bank of St. Louis, an institution with about $500 million in assets, commented on the benefit of equity pay. “A vested board member should be on the same page as the shareholders. The performance of the bank will drive the share value and that will be the incentive to effectively develop the business,” he says.
Meeting fees went up for almost all committees at both holding companies and lead banks this year, although committees at holding companies still consistently pay more. Last year, the highest meeting fees went to audit committee members of holding companies at $475 per meeting with a $4,000 retainer while chairmen were paid $5,000 annually. This year, audit committee members at holding companies report a median $600 meeting fee with a $4,500 retainer and chairmen are paid $7,100 annually.
About half of the respondents (49 percent) do not use a compensation consultant. Thirty-six percent use one on a project basis and 15 percent use one on an ongoing basis. Determining director compensation levels still remains a chiefly internal matter. Less than 2 percent of banks rely on outside consultants as their primary means of determining compensation. Forty-four percent of banks report their compensation committee is primarily responsible for setting compensation, while 35 percent list the board and 12 percent list the CEO as primarily responsible.
Eighty-one percent of respondents report their compensation committees meet quarterly (81 percent); 15 percent meet bi-monthly and 5 percent monthly. A significant number of respondents reported that their compensation committees only meet annually or “as needed.” These numbers are similar to last year’s results.
The survey’s respondents were comprised of 34 percent CEOs, 28 percent board chairs, 44 percent outside directors, 19 percent inside directors and 4 percent lead directors. These percentages do not add up to 100 percent due to single respondents holding multiple titles.
Of the banks represented, 9 percent have less than $100 million in assets, 25 percent are between $100 million and $250 million, 24 percent are between $251 million and $500 million, 17 percent are between $501 million and $1 billion, 18 percent are between $1.1 billion and $5 billion, and 6 percent have more than $5 billion in assets. Of the respondents, 40 percent are publicly traded, 56 percent are private and 4 percent are mutual. Only 14 percent are de novo banks.